By Ruth Williams
When it comes to corporate Australia and climate change, 2018 is shaping up as a perfect storm.
Investors, regulators and litigation lawyers are all circling, ramping up their scrutiny on how companies are planning for climate change, how they are trying to tackle it, and what information they are releasing about the risks it poses to their operations.
More than 200 institutional investors with $26 trillion in assets under management said they would step up pressure on the world’s biggest corporate greenhouse gas emitters to combat climate change.
The Australian Prudential Regulation Authority has begun pressing financial companies on their awareness of climate change risks, and is encouraging them to run “stress tests” on climate risk scenarios. It is also working with other regulators, APRA executive board member Geoff Summerhayes said in a speech late last year.
In his speech, Summerhayes warned of the potential impact on account holders, policyholders and members if financial institutions jeopardised their own futures by failing to adequately plan for the future. His final message? Don’t “[fight] against the rising tide”.
It’s a message echoed by some of the world’s biggest investors, including Australian super funds and fund managers, an increasing number of which are promising to flex their muscles on the issue following the 2015 Paris agreement, pressure from regulators and – increasingly – their own members.
“We are going to see a significant increase in the attention investors are giving [to climate change risk],” says Pauline Vamos, chief executive of governance firm Regnan.
“There are now much better tools by which to measure climate change risk, there’s increased attention by APRA, and trustees of super funds are being asked how they are taking that risk into account.”
This year, investors will demand more detailed and complex information about climate change and its potential financial impact on companies; many have backed a new set of guidelines developed by the G20’s Financial Stability Board taskforce on Climate-related Financial Disclosure, known as the TCFD recommendations. These guidelines, which have also been endorsed by big corporates including BHP, AGL and National Australia Bank, encourage companies to disclose climate change risks – and opportunities – under different scenarios for how the world may deal with climate change.
They aim to provide investors with “clear, comparable and consistent” information.
The TCFD recommendations will have a “significant” impact, Vamos says. “We all know climate risk is going to impact everybody and every organisation in different ways,” she says. “The key is, for some companies it’s a material risk that needs to be measured.”
ANZ is one company that has already published some of this information; its latest sustainability report includes details of climate-related risk – such as potential drought and low rainfall in rural areas of Australia and New Zealand – and opportunities, such as the potential to offer funding and advice to customers in renewable energy.
But this level of disclosure is rare in Australia, with research by the Australian Council of Superannuation Investors finding that while some big local companies are becoming more transparent about climate risk, others – as many as 70 in the ASX200 – declined to mention the issue altogether in their 2016 reports.
This is likely to change.
More than 200 institutional global investors accounting for more than US26 trillion in funds under management – including AustralianSuper, AMP Capital, Colonial First State and Cbus – recently launched the Climate Action 100+ campaign, which will, from this year, push the world’s 100 biggest emitting companies to curb emissions and to boost disclosure around climate change risks.
The campaign aims to make directors accountable for managing climate risk, with investors suggesting they would consider votes against director re-elctions to make their point – as well as with the increasingly-used tool of shareholder resolutions.
Last year saw landmark votes at oil giants ExxonMobil and Occidental, which backed resolutions that demanded the companies disclose more about their climate change risk. Similar resolutions in Australia attracted small votes in favour, but helped bring attention to the issue.
“We found that shareholder resolutions have matured significantly over the past four or five years, and asking these companies to have better disclosure around climate change, for example, we think is a fundamental and important key disclosure for long-term investors,” says Bill Hartnett, head of sustainability at Local Government Super, which supported climate change-related resolutions at Origin Energy, Santos and BHP.
And at a Governance Institute conference last month, AMP Capital’s Karin Halliday revealed that the investment manager had chosen to abstain from voting on some resolutions, to “send a signal” to the companies involved.
For some companies, climate change and its various implications looms as a significant risk. For others, the risks may be small. And while some big emitters may be reluctant to act or even disclose their risks, others may have comprehensive plans in place.
The point, investors say, is that they need to be able to know which companies fall into which categories – so they can price, manage and disclose their own portfolios accordingly.
As Andrew Gray, AustralianSuper’s head of governance, said at the Climate Action launch last month: “If climate change risk is mis-priced, that represents an investment risk to us.”
As 2018 gets underway, companies and boards are also concerned about the threat of climate-related legal action – a hot topic, following the 2016 release of Noel Hutley SC’s opinion on directors’ liability for failing to consider and disclose climate risk. “There has been an increase in litigation particularly overseas, and that will start in Australia,” Vamos says.
Late last year, Melbourne law practice Environmental Justice Australia launched a case arguing the Commonwealth Bank had breached corporate law by not disclosing climate change as a major or material risk in its annual report. That case was dropped following the bank’s latest annual report, which discussed climate risk, however CBA denied it had breached any laws or made any changes due to the litigation.
“There is a lot of interest in this area,” says David Barnden, a lawyer at Environmental Justice. He says his group is continuing to “explore legal avenues” on climate change risks – not only with laws requiring companies to disclose material financial risks, but also on bans covering misleading and deceptive conduct. Super fund trustees, as well as company directors, could be in the frame, he says.
Some investors, like New York City last week, are choosing to sell out of big-emitting companies altogether.
In Australia, LGS screens out companies that derive a third or more of revenues from so-called “high carbon sensitive activities”, including coal mining and coal-fired power stations. This decision, taken in 2014, resulted in the divestment of 25 companies – many of which, Hartnett says, have since filed for bankruptcy. He says the move added 7 basis points to the performance of the fund in the past three years.
But companies are unlikely to face a sudden evacuation of shareholders from their registers, with the big investors fronting Climate Action last month arguing forcefully against divestment. “In a way it lets the companies off the hook,” said CalPERS’s Anne Simpson.
“There’s nowhere to hide from climate risk – we’ve got to address it,” she said. “We have the tools, as the owners of these companies, to drive this forward.”
Published by The Age on 20 January 2018